Title of presentation

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1 Title of presentation Dr Willie de Beer Chief Operations Officer EDI Holdings

2 Are the REDs Dead?

3 Presentation Outline Current Electricity Supply Industry Structure Current Situation Supply / Demand : In Balance or In Crises? Current Electricity Situation from an EDI Perspective EDI Maintenance Perspective Municipal Case Study : Maintenance and Refurbishment Requirement EDI Maintenance and Refurbishment Requirement Technical and Non-Technical Losses Conclusion

4 Electricity Supply Chain POWER STATIONS GENERATION Transmission Lines TRANSMISSION SUBSTATION TRANSMISSIO N (765/400/275 kv) ELECTRICITY DISTRIBUTION INDUSTRY (EDI) FOCUS DISTRIBUTION (132/88/66/44/33 kv) Distribution Lines Reticulation Lines SERVICE CONNECTION Reticulation LV Lines 380/220V Reticulation HV Lines 22 and 11kV DISTRIBUTION SUBSTATION

5 Current situation ( 1) Capacity Shortage Longer Term Problem Planning reserve margin currently 8 10% against 15% aspiration (limited opportunity for maintenance) A number of generation units are in mid-life, thus requiring major planned maintenance and refurbishment Current constraints Unplanned outages higher than usual Generator output reductions (coal quality, handling & stockpiles) Source: Eskom

6 Current situation ( 2) Plant performance impacted by higher load factor Immediate Power System Security Problem Vulnerability increased to unacceptable level Thursday, 24 January 2008 The highest continuous load shedding of 4000 MW was required and this compromised system protection High load shedding due to current constraints Coal handling problems would continue and possibly increase with rain forecasts Customers informed of vulnerability of system and requested to make their processes safe Source: Eskom

7 Supply/Demand: In balance or In crises Current Realities New build programme delayed Generation assets stressed (time constraints for maintenance) Capacity shortages (under-frequency events, interruptibility and load-shedding, etc) Energy shortages more evident Customers unhappy with industrial customers (because of interruptibility arrangements) Stronger economic growth (pressure for increased supply) Situation expected to deteriorate over next 8 years Source: Eskom Slide 7

8 Current electricity situation from an EDI perspective ( 1) The electricity distribution industry (EDI) is part of a broader ESI value chain Challenges experienced in generations filter through to distribution Current load-shedding These generation capacity problems will disguise distribution challenges for some time to come Every lights off moment will most likely be interpreted as load shedding whilst it could as well be a distribution issue

9 Current electricity situation from an EDI perspective ( 2) In 5-7 years time major generation challenges will be overcome and distribution will be exposed if nothing happens now: Fragmentation and absence of economies of scale Maintenance backlogs Significant variance in tariff structure Inconsistent electrification performance

10 NERSA report: EDI maintenance perspective Distributor Reliability Control Maintenance Networks Skills Funding Eskom Southern Region G VG VG-E G-VG VG-E G Eskom Western Region G VG VG-E G-VG VG-E G Metro 1 G VG VG-E VG G G Metro 2 G VG G G-VG G NI Metro 3 G G-VG G-VG G-VG G G Metro 4 G-VG NI I NI G G Metro 5 NI NI G G-VG NI NI Municipality 1 NI NI G NI NI NI Municipality 2 NI NI NI NI G NI Municipality 3 NI NI NI NI NI NI Municipality 4 NI NI NI NI NI NI E=Excellent; VG=Very Good; G=Good; NI=Needs Improvement Source: NERSA Independent Technical Audit Slide 10

11 Municipal case study Slide 11

12 Municipal case study: narrative The information is based on 2003/2004 as a base year The combined red and blue bar indicates the total refurbishment investment backlog The red bar indicates the current funding allocation The blue bar reflects the balance of the backlog still to be addressed The graph therefore indicates that: Base year and projected investment suggests an under-investment in addressing the refurbishment requirement While it is acknowledged that the ability of the entity to generate revenue is critical to support financial expenditure, consideration must be given to increase the refurbishment investment At the current rate of refurbishment investment, the current entity will not wipe out the current refurbishment backlog in the next 10 years

13 Municipal case study

14 Municipal case study: narrative The information is based on 2003/2004 as a base year The blue bar reflects the total maintenance and refurbishment requirement per annum for the entity The red bar reflects the current maintenance and refurbishment allocation The green bar reflects therefore the additional combined maintenance and refurbishment requirement Slide April 2008

15 Municipal case study: narrative The graph clearly illustrates that the combined maintenance and refurbishment requirement is underfunded, which will results in an increase in maintenance and refurbishment backlog, which will filter through into the network reliability and performance The underfunding of the maintenance and refurbishment will result in a further increase in the plant deterioration Amongst a number of conclusions that can be derived from the above graph, the most critical one is that the current excessive switching of plant due to load shedding will create an accelerated deterioration of the plant status since it is not maintained at the desired level. Slide April 2008

16 EDI refurbishment requirement

17 EDI refurbishment requirement: narrative The information is based on 2003/2004 as a base year The combined red and blue bar indicates the total refurbishment investment backlog for the industry The red bar indicates the current funding allocation The blue bar then reflects the balance of the backlog still to be addressed The graph therefore indicates that: Base year and projected investment suggests an underinvestment in addressing the refurbishment requirement At the current rate of refurbishment investment, the industry will not wipe out the current refurbishment backlog in the next 10 years

18 EDI combined maintenance and refurbishment requirement Slide 18

19 EDI combined maintenance and refurbishment requirement The information is based on 2003/2004 as a base year The dark blue bar reflects the current projected investment The red bar reflects the required combined refurbishment and maintenance requirement The green bar reflects the total additional requirement excluding the current investment The purple, light blue and orange is a breakdown of the combined maintenance and refurbishment requirement as reflected in the green bar

20 UBS investment research March 2008 In addition to the lack of investment in generating capacity, the South African electricity distribution network is (according to industry experts) also in a state of critical underinvestment. Eskom is responsible for 95% of generation and 100% of transmission. Distribution, however, is owned about between Eskom itself and the munics (municipalityowned distribution companies). As a rule of thumb, distribution companies should be investing at a rate of about 10% of asset value per year. However, for a number of reasons beyond the scope of this report, investment rates in many (especially non-eskom) distribution companies are as low as 1-2% per year. Thus, while much of the focus has been on generating capacity, a major threat to efficient energy supply is distribution.

21 Technical and non-technical losses per RED Slide 21

22 Technical and non-technical losses per RED: narrative Losses in a utility are categorised into technical and nontechnical losses. Technical losses: Network related losses associated with the flow of current through the conductors Non-technical losses: Losses normally associated with administrative processes, non-payment, incorrect billing, energy theft e.g. meter tampering The norm based on international research, suggest that 7% combined technical and non-technical losses is achievable Based on the high losses experienced in the SA industry and considering the international trends, it is regarded as realistic to do an improvement of 2% per annum Based on the above, the graph suggests an improvement plan over a 5 year period which will bring each of the REDs within the recommended norm of 7%

23 Potential savings in GWh Assumptions: POTENTIAL SAVINGS GWh Base Year Yr 1 Yr 2 Yr 3 Yr 4 Loss 11,970 10,340 8,711 7,081 6,022 Potential Savings 1,629 1,629 1,629 1, Losses are reduced from 16.64% average to a norm of 7%. 2.Total Potential Savings = 6,842 GWh Source: EDI Holdings Industry Model based on 2003/2004 figures

24 Typical strategies to reduce losses Technical Losses Network configuration - strengthening Power Factor Correction Load balancing Effective maintenance Load flow and network capacity management Typical constraints: Large investment required System constraints Slide 24

25 Typical strategies to reduce losses Non-Technical Losses Metering Error Management Metering Audits Electricity theft management Sales report management Inspections Investment in technology, e.g. split metering Billing process and system improvement Credit control management

26 6 wall-to-wall REDs City of Johannesburg Metro RED 6 City of Tshwane Metro Provincial Boundaries RED 4 Ekurhuleni Metro RED 1 RED 2 RED 5 ethekwini Metro Cape Town Metro RED 3 Nelson Mandela Bay Metro

27 Business model: RED sustainability OPERATING & CAPITAL EXPENDITURE REVENUE RED FINANCIAL SUSTAINABILITY CREATING SHAREHOLDER AND CUSTOMER VALUE EFFIENCY AND CONTINIOUS BUSINESS IMPROVEMENT

28 Business model: Brief summary Promote RED sustainability Balance between revenue realisation and continuous business efficiency improvement Close to the customer Decentralised focus Effective shareholder and stakeholder management Focus on, interalia: Technical losses Non-technical losses Effective asset management Staff development and skills retention

29 Business model: Brief summary Service Provider to Service Authority (Municipalities) SDA as contemplated in MSA 2000 Section 81 Distinct wires and retail focus Pursue appropriate best practices Benchmarking Integrated inter RED network management approach: Managing distribution grid integrity Enhance customer interface opportunities

30 EDI interim state REDs x 6 EDI Holdings Direct & Oversee EDI Restructuring Wires Retail Shared Services Industry Association

31 Potential EDI future state EDI Holdings Direct & Oversee EDI Restructuring REDs x 6 Retail Companie s x n Shared Services Industry Association Wires

32 Progress towards sustainable REDs o o o o o 2003 to to to Date EDI Holdings established Eskom Distribution ringfenced within Eskom Holdings Boundaries for the six REDs defined Eskom and SALGA signed the accession to the co-operative agreement EDI Holdings developed various tools to reduce cost and to facilitate the restructuring process o o o o o o o Eskom Distribution (7 Regions) aligned with the boundaries of the six REDs RED project governance structures implemented Transitional Labour Relation Structure (TLRS) established Metros and numerous municipalities started the MSA Sect 78 process and business ringfencing NERSA approved (April 2006) through the MYPD R1.2bn over a 3 year period to assist in funding some of the EDI restructuring costs 25 th October 2006 Cabinet reconfirmed support to the creation of six wall to wall REDs as Public Entities RED 1 was established (June 2005)as a Municipal Entity wholly owned by the City of Cape Town & liquidated by City of Cape Town during 2007 o Municipal electricity business asset transfer enabling mechanism approved by National Treasury o Eskom Distribution 95% ringfenced o Boundary energy metering installed as per the six RED footprint o 120 Municipalities (ITD) signed the accession to the co-operative agreement o 3 Metro s & 13 municipalities completed Section 78 process o 4 Metro s & 13 municipalities ringfenced o All Six RED establishment governance structures and stakeholder engagement structures established and operational o Extensive progress towards a system solution for the future REDs o Funding and support mechanisms in place to support readiness activities

33 Conclusion Conclusion Never before has the environment for the establishment of the REDs looked so promising The constraints that were protracting the process are well on their way to being resolved The immediate focus for 2008/9 financial year will be: Finalising the implementation strategy Concluding the Deal (both design and negotiation) Advocating for the EDI restructuring enabling legislation and policies to ensure rapid implementation; Development of a systems solutions for the industry;

34 Conclusion Conclusion Enhancing current asset owner readiness to transfer to the REDs Continued stakeholder engagement to ensure that the restructuring process is accelerated The current electricity challenges calls for an integrated and holistic approach to the solution from all industry players, business and citizens of this country A restructured Electricity Distribution Industry can only contribute to a sustainable industry: Support the economic growth required Create investor confidence Meet customer expectations